ProfessorBainbridge.com

New Article by Yours Truly: Long-Term Bias and Director Primacy

Long-Term Bias and Director Primacy (August 4, 2020). the Columbia Business Law Review (forthcoming), UCLA School of Law, Law-Econ Research Paper No. 20-04, Available at SSRN: https://ssrn.com/abstract=3666593

Abstract In an important recent contribution to the short-termism debate, Professors Michal Barzuza and Eric Talley what they call an “emerging consensus in certain legal, business, and scholarly communities … that corporate managers are pressured unduly into chasing short-term gains at the expense of superior long-term prospects. See Michal Barzuza & Eric L. Talley, Long-Term Bias (February 20, 2019), forthcoming in the Columbia Business Law Review, available at SSRN: https://ssrn.com/abstract=3338631. Instead, Barzuza and Talley contend that that “corporate managers often fall prey to long-term bias—excessive optimism about their own long-term projects.”

This article is an invited comment on Barzuza and Talley’s article. Subject to various quibbles raised herein, I broadly concur with Barzuza and Talley’s argument that corporate directors and officers can be biased towards long-term projects and, accordingly, may reject short-term projects offering higher returns.

But what law reforms follow logically from their conclusion, if any? With respect to judicial review, I want to differ with Barzuza and Talley on three points. First, I believe Barzuza and Talley overstate the risk of judicial intervention. Second, they fail adequately to distinguish between directors and managers, even though that distinction is central to the application of Delaware law. Third, I believe their analysis implies that judges should retain the deference to director decision making inherent in doctrines such as the business judgment rule and intermediate review.

With respect to encouraging shareholder activism, I argue that the responsibility for policing managerial hyperopia (or myopia, for that matter) should be assigned to the board of directors, not the shareholders. Heterogenous shareholders lack the proper incentives and knowledge to properly police management.

Keywords: corporate governance, management, directors and officers, short-term, long-term, behavioral economics

JEL Classification: K22

The Fourth Edition of Bainbridge on Corporate Law from Foundation Press' Concepts and Insights Treatise Series is Out

Many students find their Corporation Law class difficult because they do not understand the transactions giving rise to those cases. As with its predecessors, this fourth edition is intended to assist students by not only restating the law but also by putting the law into its business and financial context. The pedagogy is up-to-date, with a strong emphasis on the doctrinal issues taught in today's Corporations classes. The text is highly readable: The style is simple, direct, and reader-friendly. Even when dealing with complicated economic or financial issues, the text seeks to make those issues readily accessible.

This new edition brings the material up-to-date with complete coverage of developments in both state corporate law and federal securities law.

Law school faculty can view it here. Please consider recommending it to your Corporations and Business Associations students.

The Bainbridge Hypothetical Makes it into the National Law Review

From the National Law Review:

The problem of stakeholderism is brilliantly illustrated by the eponymous Bainbridge Hypothetical:

"[S]uppose that the board of directors is considering closing an obsolete plant. The closing would harm the plant's workers and the local community.  However, the closing would benefit shareholders, creditors, and employees at a more modern plant to which the work previously performed at the old plant would be transferred.  Moreover, the closing would benefit communities around the modern plant.  Assume that the latter groups cannot gain except at the former groups' expense. By what standard should the board make the decision?  Shareholder wealth maximization provides a clear answer to this otherwise difficult situation--close the plant.  The alternative to following the shareholder wealth maximization norm would, on the other hand, force directors to struggle with indeterminate balancing standards. In turn, such standards would deprive directors of the critical ability to determine ex ante whether their behavior comports with the law's demands, thereby raising the transaction costs of corporate governance."

BTW, it turns out that post was from Keith Paul Bishop.

Making Sense of The Business Roundtable’s Reversal on Corporate Purpose

Bainbridge, Stephen Mark, Making Sense of The Business Roundtable’s Reversal on Corporate Purpose (July 30, 2020). UCLA School of Law, Law-Econ Research Paper No. 20-03, Available at SSRN: https://ssrn.com/abstract=3664078

Abstract: In August 2019, the Business Roundtable (BRT) issued a statement on the purpose of the corporation in which it reversed a longstanding position. Since 1978, the BRT has periodically issued statements on Principles of Corporate Governance, which purport to summarize law and best practice in this area. Since 1997, all versions of those statements had embraced the view that corporations exist primarily to serve their shareholders. In contrast, the 2019 version contains a much broader conception of corporate purpose, which posits that corporations should “commit to deliver[ing] value to all of” the corporation’s stakeholders.

Obviously, the BRT cannot unilaterally change the law. As this article explains, the law of corporate purpose remains that directors have an obligation to put shareholder interests ahead of those of other stakeholders and maximize profits for those shareholders.

What people do matters more than what they say. To date, the evidence is most BRT members remain committed to shareholder value maximization, despite their recent rhetoric to the contrary. This should not be surprising. The incentive structure faced by directors and managers still skews in favor of shareholders.

Why then did the BRT shift position? This article suggests two possibilities. First, the members may be engaged in puffery intended to attract certain stakeholders for the long-term benefit of the shareholders. Specifically, they may be looking to lower the company’s cost of labor by responding to perceived shifts in labor, lower the cost of capital by attracting certain investors, and increase sales by responding to perceived shifts in consumer market sentiment. They may also be trying to fend off regulation by progressive politicians. Second, some BRT members may crave a return to the days of imperial CEOS.

This article is a response to Jeffrey M. Lipshaw, The False Dichotomy of Corporate Governance Platitudes, Journal of Corporation Law (forthcoming).

Keywords: corporate law, corporate social responsibility, ESG, board of directors, corporate purpose

JEL Classification: K22, M14

The front matter for my new Advanced Corporation Law casebook: Table of content, table of cases, preface, Chapter 1

After I announced that my new Advanced Corporation Law casebook was in galleys, Tennessee law professor Joan Heminway (@VolunteerTwit) kindly suggested I post the front matter--table of contents, preface, table of cases, etc...

Glad to do it. I also included Chapter 1 as a sample. Download the front matter here.

Comments welcome; indeed, encouraged.

My new casebook Advanced Corporation Law is in galley

I'm very excited to announce that I've gotten the galleys for my forthcoming casebook on Advanced Corporation Law. It will be coming out in the fall for Spring 2021 adoptions.

This text is designed for use in an advanced course in corporate law and governance. It assumes that students have taken a basic course in Corporations or Business Associations.

Corporate governance has been much in the news in recent years and lawyers are devoting increasing amount of attention to it. The passage of major federal legislation in 2002 (the Sarbanes-Oxley Act a.k.a. SOX) and 2010 (the Dodd-Frank Act) were particularly important developments, generating much new law and, as a result, much new legal work. Curiously, however, the law school casebook market has largely ignored these trends.

Corporate governance is regulated by many of the same laws covered in the basic Business Associations course, but increasingly is also regulated by laws¾such as SOX and Dodd-Frank¾that get short shrift in the typical Business Associations casebook and course. In contrast, those laws are the core focus of this text.

Unlike the more basic topics that dominate Business Associations, which are a product of state corporate law with a minor federal overlay, corporate governance is regulated by a much more complex body of law that emanates from multiple regulators. Many of the rules of corporate governance come from traditional state corporate and federal securities law sources, but many more come from sources such as stock exchange listing standards or rules issued by the Public Company Accounting Oversight Board and similar quasi-governmental bodies. All of these are grist for the mill in this text.

Importantly, however, lawyers practicing in the corporate governance space must be knowledgeable not only about the law but also best practice. As Sir Adrian Cadbury observed in connection with the United Kingdom’s adoption of the so-called Cadbury Code, it is tempting for managers to obey the letter of law while ignoring the deeper purposes behind it. Sound corporate governance structures thus must be informed as much by best practices as well as formal legal rules.

Likewise, this text assumes that mastering the relevant law requires situating it in an understanding of the contemporary business environment. The legal issues governing executive compensation makes little sense, for example, if one does not understand the political and economic debate over CEO pay. Similarly, to cite just one more example, mastering the high-profile issues respecting shareholder rights will be much easier if the students are familiarized with the changing demographics of shareholders and the rise of activist hedge funds.

Notice that I refer to this book as a text rather than a casebook. Although the text includes many canonical cases presented in the traditional format, the case method is not the only—or even always the best—way of teaching students to draft workable contracts and disclosure documents, conduct due diligence, or counsel clients on issues that require business savvy as well as knowing the law. Accordingly, the book also relies on textual explication, sample documents, and problems to build student transactional skills.

This approach is driven by my belief that, because lawyers plan at least as often as they litigate, advanced business law course texts need to adopt a transaction planner’s perspective. Most law school casebooks—even in the corporate law area, where the authors ought to know better—have an inherent bias towards litigation perspectives due to their emphasis on cases. I avoid that by using additional sources, such as law review articles and regulatory materials, and by including numerous problems—typically at the start of a block of material—requiring students to think about how the materials will affect real world transactions and planning.

The text assumes familiarity with some basic law and economics tools—such as transaction costs and agency costs—that are commonly used in many business law classes. Indeed, the central theme of this text is the agency costs resulting from the separation of ownership and control in public corporations. The appendix offers a brief overview of these tools for the benefit of those students who have not encountered them previously.

Yours truly quoted by Korn Ferry re being an M&A acquirer in COVID-19

From Briefings Magazine:

After lying low at the start of the outbreak, well-stocked firms are hunting for merger deals. Could that speed up any recovery? ...

Stephen Bainbridge, a UCLA law professor who specializes in M&A, says leaders are often overly optimistic about their ability to turn around businesses in deep trouble—and end up creating more financial problems than solving them. “Merging a failing company into a healthy one could get the healthy company in trouble,” says Bainbridge. “It could end up being dragged down.”

Or, as Bainbridge says, “Successful mergers depend on the ability to build a new team and integrate cultures in a way that gets buy-in from everyone as quickly as possible, and that’s going to be incredibly hard to do over Zoom.”

VC Laster's Dell Decision Gives a Very Director Primacy Spin on MFW

In his recent opinion in In re Dell Techs. Inc. Class V Stockholders Litig., 2020 WL 3096748 (Del. Ch. June 11, 2020), Vice Chancellor Laster gave a very board-centric spin on the MFW rule. Tyler O'Connell's Morris James blog post explains:

The Delaware Supreme Court’s MFW decision provides a safe harbor for controlling stockholder buyouts that are conditioned upon approval of a special committee of independent directors and a majority-of-the-minority vote, provided, inter alia, “there is no coercion of the minority.” Kahn v. M & F Worldwide Corp. (MFW), 88 A.3d 635, 645 (Del. 2014). The Court of Chancery’s recent decision in In re Dell Tech. Inc. Class V. S’holders Litig., 2020 WL 3096748 (Del. Ch. Jun. 11, 2020), held that a redemption of minority stockholders’ shares failed to satisfy MFW due to the company’s decisions to give the special committee an impermissibly narrow mandate and then bypass it to negotiate directly with minority stockholders. 

The Vice Chancellor didn't cite my work on director primacy, but the opinion is very much in the spirit of director primacy:

MFW’s dual protections contemplate that the Special Committee will act as the bargaining agent for the minority stockholders, with the minority stockholders rendering an up-or-down verdict on the committee’s work. Those roles are complements, not substitutes. A set of motivated stockholder volunteers cannot take over for the committee and serve both roles.

The MFW framework contemplates that the special committee will act as “an independent negotiating agent whose work is subject to stockholder approval.” Flood, 195 A.3d at 767. Through the involvement of the special committee, the MFW framework ensures that there are “independent, empowered negotiating agents to bargain for the best price and say no if the agents believe the deal is not advisable for any proper reason ....” MFW, 88 A.3d at 644 (internal quotation marks and emphasis omitted). Like a board of directors in an arm’s-length transaction, the committee has superior access to internal sources of information, can deploy it’s the Board’s statutory authority under Section 141(a) as delegated to the committee under Section 141(c), and can “act as an expert bargaining agent.” In re Cox Commc’ns, Inc. S’holders Litig., 879 A.2d 604, 618 (Del. Ch. 2005); see 8 Del. C. § 141(c). Like a board of directors, the committee “does not suffer from the collective action problem of disaggregated stockholders” and is therefore well positioned “to get the last nickel.” Id. at 619; see also In re Pure Res., Inc. S’holders Litig., 808 A.2d 421, 441 (Del. Ch. 2002) (“Delaware law has seen directors as well-positioned to understand the value of the target company, to compensate for the disaggregated nature of stockholders by acting as a negotiating and auctioning proxy for them, and as a bulwark against structural coercion.”).

He then described the shareholders' role in the MFW framework as being "more limited":

They have “the critical ability to determine for themselves whether to accept any deal that their negotiating agents recommend to them.” MFW, 88 A.3d at 644 (internal quotation marks omitted). But “the ability of disaggregated stockholders to reject by a binary up or down vote obviously ‘unfair’ deals does not translate to their ability to do what an effective special committee can do, which is to negotiate effectively and strike a bargain much higher in the range of fairness.” Cox Commc’ns, 879 A.2d at 619.

Laster's interpretation of the relative board and shareholder roles is consistent with the approach I outlined in The Geography of Revlon-Land, 81 Fordham L. Rev. 3277 (2013):

In their efforts to decide who decides, the Delaware courts have grappled with the limits of a target corporation's board of directors' power to act as a gatekeeper in corporate acquisitions. In other words, to what extent can the target's board of directors prevent the target's shareholders from deciding whether the company should be acquired?

In a merger, two corporations combine to form a single entity. In an asset sale, the selling corporation transfers all or substantially all of its assets to the buyer. In both transactions, approval by the target board of directors is an essential precondition.

In both major forms of statutory acquisitions, the board thus has a gatekeeping function. Shareholders have no power to initiate either a merger or asset sale, because the statute makes board approval a condition precedent to the shareholder vote. If the board rejects a merger proposal, the shareholders thus have no right to review that decision. Instead, the shareholder role is purely reactive, coming into play only once the board approves a merger proposal.

The board also has sole power to negotiate the terms on which the merger will take place and to enter a definitive merger agreement embodying its decisions. Shareholders have no statutory right to amend or veto specific provisions, their role typically being limited to approving or disapproving the merger agreement as a whole . . . .

If the board disapproves of a prospective acquisition, the would-be acquirer therefore must resort to one of the nonstatutory acquisition devices. The proxy contest, share purchase, and tender offer all allow the bidder to bypass the target board and make an offer directly to the target's shareholders. Since the 1960s, the tender offer has been the most important and powerful of these tools. Almost as soon as the hostile tender offer emerged as a viable acquirer tactic, however, lawyers and investment bankers working for target boards began to develop defensive tactics designed to impede such offers. If validated by the courts, these takeover defenses promised to reassert the board's primacy by extending its gatekeeping function to the nonstatutory acquisition setting.

Consider the poison pill, for example, which has been called the “de rigeur tool of a board responding to a third-party tender offer.” … Proponents of pills contend that these plans thus do not deter takeover bids, but rather simply give the target board leverage to negotiate the best possible deal for their shareholders or to find a competing bid. In any case, it is clear that “the poison pill has made the board the ‘gatekeeper’ instead of the shareholders.” As a result, target boards have been empowered to play an active--and often determinative--role in the very class of transactions originally designed to bypass them entirely.

The 2020 Statutory Supplement

In times of crisis, it may be helpful to know that there are certain things you can count on. For example, every year since 1998, William Klein, Mark Ramseyer, and I have brought out an updated statutory supplement for use in Business Associations and Corporations Law Classes. And, so, once again we present the 2020 edition.

 

This statutory supplement includes statutes and rules relevant to all business entities. It is suitable for use with all textbooks and casebooks for such courses. It includes all updates to the statutes and rules.

 

You can review the Table of Contents here.

 

 

Bob Cochran on Law and Lawyering

The final version of my contribution to the Pepperdine Law Review festschrift for Bob Cochran is now available:

Bainbridge, Stephen Mark, Bob Cochran on Law and Lawyering: A Catholic Perspective. 47 Pepperdine Law Review 371 (2020); UCLA School of Law, Public Law Research Paper No. 19-21 (2019). Available at SSRN: https://ssrn.com/abstract=3421790 

Abstract: This essay is a contribution to a festschrift honoring Pepperdine law professor Robert Cochran. In addition to his many other professional accomplishments, Professor Cochran is a leading figure in the study of Law and Christianity.

One strain of Law and Christianity scholarship focuses on normative critiques of substantive legal issues based on Christian theology. In other words, it seeks to make the civil law more moral; i.e., to conform Man’s Law to God’s Law. A second strain seeks to help lawyers deal with the difficulties inherent in being a Christian and a lawyer. As Cochran has put it, one might ask “whether there is a connection between religious faith and what ordinary lawyers do in ordinary law offices on ordinary Wednesday afternoons.”

Cochran’s work has intersected both possibilities. In Part I of this Article, I tackle his analysis of the extent to which we should strive to harmonize God’s and Man’s Law. In Part II, I turn to Cochran’s analysis of the Christian lawyer’s vocation. In both parts, I come at his work from the perspective of a Roman Catholic called upon to give religious assent to both Christian scripture and, where I differ from Cochran, the Church’s Magisterium.

My WLF Legal Pulse column on federal forum selection clauses and Salzberg v. Sciabacucchi is now up

You can download it here.

A sample of yours truly teaching SOX Legal Ethics from home during the coronavirus crisis using Zoom

SCOTUS Oral Arguments on the CFPB: Will Kavanaugh Remember to Cite Yours Truly?

Bloomberg reports that:

The U.S. Supreme Court seemed inclined to give the president more power over the Consumer Financial Protection Bureau as the justices considered whether Congress went too far in trying to insulate the agency from political pressure.

Hearing arguments in Washington Tuesday, the court’s conservatives suggested they agreed with Trump administration contentions that the Constitution requires the president to have broad ability to fire the agency’s director. When Congress set up the agency, it gave the director a five-year term and said the person could be ousted only for specified reasons.

Justice Brett Kavanaugh noted that the current CFPB director, an appointee of President Donald Trump, is serving a term that will last until the end of 2023. “The head of this agency will go at least three or four years into the next president’s term, and the next president might have a completely different conception of consumer financial regulatory issues, yet will be able to do nothing about it,” Kavanaugh said.

Back in 2018 when he was still on the DC Circuit, then Judge Kavanaugh dissented in a CFPB case. In that case, he cited yours truly:

As compared to a single-Director independent agency structure, a multi-member independent agency structure—and its inherent requirement for compromise and consensus—will tend to lead to decisions that are not as extreme, idiosyncratic, or otherwise off the rails. Cf. Stephen M. Bainbridge, Why a Board? Group Decisionmaking in Corporate Governance, 55 Vand. L. Rev. 1, 12-19 (2002).

PHH Corp. v. Consumer Fin. Protec. Bureau, 881 F.3d 75, 184 (D.C. Cir. 2018). It's not clear to me whether the current case will end up tackling the multimember issue. but one hopes so. 

An autobiographical Twitter thread

All about me:

1/ I've picked up about 200 new followers this week thanks to that Slate business. So for you new guys here's an introduction: I am often cynical, sarcastic, light-hearted, iconoclastic, or frivolous. I'm serious about my faith, corporate law, wine, cooking, my wife, and my dogs.

— Professor Bainbridge (@ProfBainbridge) February 26, 2020

Yours truly cited by Delaware Chancery Court in the Panera Bread Company Appraisal case

From Vice Chancellor Zurn's opinion:

The board of directors “has the sole power to negotiate the terms on which the merger will take place and to arrive at a definitive merger agreement embodying its decisions as to those matters.”⁴³⁴

⁴³⁴ Stephen M. Bainbridge, Mergers and Acquisitions 56 (2d ed. 2009) (citing 8 Del. C. § 251(b)); accord 8 Del. C. § 141 (“The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors ....”).

IN RE APPRAISAL OF PANERA BREAD COMPANY, CV 2017-0593-MTZ, 2020 WL 506684, at *25 (Del. Ch. Jan. 31, 2020).

The preponderance of the evidence shows that the board directed Shaich’s negotiations and “arrive[d] at a definitive merger agreement embodying its decisions as to th[ose] matters.”⁴⁶³

⁴⁶³ Bainbridge, supra note 434, at 56.

Id. at *26.